Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
Eight Years and Acres Later: Single Asset Real Estate Cases After BAPCPA
Russell M. Blain1
Edward J. Peterson2 Amanda E. Chazal3
STICHTER, RIEDEL, BLAIN & PROSSER, P.A. Tampa, Florida
INTRODUCTION
The Bankruptcy Reform Act of 1994 created special treatment for single asset real
estate debtors and a definition for “single asset real estate” (“SARE”) in §101(51B) of the
Bankruptcy Code. The subsequent enactment of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005 (“BAPCPA”), in expanding the SARE debt limit and
thereby redefining SARE, ostensibly created new leverage for lenders—often the only
significant creditors in a SARE case—to expedite the disposition of a case. These
changes were made “to put additional responsibility on a single asset real estate debtor
and prevent a perceived abuse of the bankruptcy process on the part of these ventures.”
In re 652 West 160th LLC, 330 B.R. 455, 460 (Bankr. S.D.N.Y. 2005) (citing S. Rep. No.
103-168 (1993)). As stated by Collier, §362(d)(3) was added to the Bankruptcy Code “to
terminate the stay when the debtor neither proposes a viable plan nor makes payments to
the secured party.”4
Since the financial meltdown of 2008 and ensuing economic crisis, there have
been an unprecedented number of filings by real estate-owning entities, putting
§§101(51B) and 362(d)(3) of the Code, purportedly added to protect the interests of
[email protected]. [email protected]. [email protected].
43 COLLIER ON BANKRUPTCY¶ 362.07[5] (15th ed. 2005).
2
secured creditors in single asset real estate cases, to the test. In the ensuing time period,
have the provisions of §362(d)(3) served their stated purpose?
I. DETERMINING STATUS AS SARE DEBTOR
The term “single asset real estate” under its original definition applied to only
those debtors with contingent, liquidated, secured indebtedness of $4 million or less. The
BAPCPA amendment to §101(51B) eliminated the $4 million cap, making even large
real estate projects subject to the SARE-specific provisions of the Bankruptcy Code. The
revised version of §101(51B) of the Code defines “single asset real estate” as follows:
The term “single asset real estate” means real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto.
11 U.S.C. §101(51B).The §101(51B) definition, discussed by the Fifth Circuit in In re
Scotia Pac. Co., 508 F.3d 214, 220(5th Cir. 2007), sets forth a three-pronged test that
must be met for a debtor to be determined to be a SARE entity:
the debtor has real property constituting a single property or project other than residential property with fewer than four residential units;
the real property generates substantially all of the gross income of a debtor; and
no substantial business is conducted on that property other than the business of operating the property and the activities incidental to the property.
In analyzing whether a debtor is a SARE candidate, a court must determine that all three
elements of the statutory definition have been satisfied. See In re View W. Condo. Assoc.,
Inc., No. 08-11561-BKC-RAM (Bankr. S.D. Fla. July 29, 2008) (citing Scotia Pac.).
The determination of whether a debtor falls within the SARE characterization is a
fact-intensive inquiry. If the debtor self-designates as a SARE, the court is constrained to
require an evidentiary showing on which to make a determination. Cases decided after
3
the 1994 Act continue to hold that debtors that have other business activities are not
SARE debtors.
A. Golf Course Cases
Some of the most instructive cases applying the BAPCPA amendments to SARE
involve golf courses as debtors. In In re Club Golf Partners, No. 07-40096-BTR-11,
2007 WL 1176010 (Bankr. E.D. Tex. April 20, 2007), the debtor owned real estate but
also operated a variety of revenue-producing activities on that real estate. The debtor
employed third-party employees, without whom little or nothing of a revenue-producing
nature would happen on the land. The debtor-derived revenues from a variety of
commercial activities on the property, including membership sales, public access fees,
golf cart usage fees, driving range fees, tennis court usage fees, pro shop merchandise
sales, clubhouse restaurant food and beverage sales, and special event income. The court
reasoned as follows:
Because its business activities are variegated and multiple and are dependent on the entrepreneurial efforts and ongoing hard work of its principals and its other employees, and because it does not simply lease its property to tenants as the owner of a true single asset real estate such as an apartment house does, the Debtor’s golf course does not fall within the scope of the definition of “single asset real estate” in Code §101(51B), and the Debtor is therefore not subject to Code §362(d)(3).
2007 WL at * 6.
The court in In re Larry Goodwin Golf, Inc., 219 B.R. 391 (Bankr. M.D.N.C.
1997),determined that a golf course with golf cart rentals, a pool, concessions, and
undeveloped property for sale constitutes a “substantial business” and not property held
solely for income and that the debtor therefore did not fall within the SARE definition.
Similarly, the court in In re CGE Shattuck LLC, No. 99-12287-JMD, 1999 WL 33457789
(Bankr. D.N.H. Dec. 20, 1999), found that a debtor was not a SARE debtor where its real
property did not generate substantially all of its gross income and a percentage of its
revenues were derived from pro shop, golf rentals, and golf-related services. The court in
In re Prairie Hills Golf & Ski Club, 255 B.R. 228 (Bankr. D. Neb. 2000), determined that
a debtor did not constitute a single asset real estate where it built and sold residences,
4
constructed roads to residences and to golf and ski areas, removed snow from golf and ski
areas, sold liquor in the clubhouse, and leased golf and ski areas to a third party.
B. Hotel cases
Hotel cases provide additional insight into SARE issues. The court in Centofante
v. CBJ Dev. Inc. (In re CBJ Dev. Inc.), 202 B.R. 467 (9th Cir. BAP 1996), found that a
hotel was not a SARE debtor because its bar, gift shop, and restaurant constituted a
significant business enterprise. In In re Whispering Pines Estate, Inc., 341 B.R. 134
(Bankr. D.N.H. 2006), the court found that, in addition to a bar, restaurant, gift shop, and
tour revenues, the debtor’s hotel operation was sufficiently active to constitute a business
other than mere operation of property. The debtor in In re Scotia Dev., LLC, 375 B.R.
764, 774-79 (Bankr. S.D. Tex. 2007), aff’d, 508 F.3d 214 (5th Cir. 2007), owned rights to
harvest and sell timber. The court found that the debtor’s timber operation was sufficient
to exclude it from SARE treatment.
C. Debtors Susceptible to SARE Designation
The affiliated debtors in In re Kara Homes, Inc., 363 B.R. 399 (Bankr. D.N.J.
2007), in submitting their initial bankruptcy petitions and statements of financial affairs,
identified themselves as single asset real estate entities. After examining the debtors’
operations, the Kara Homes court determined that the activities of acquiring land and
planning and marketing communities were incidental to the debtor’s efforts to sell homes
and that the affiliated companies were single asset real estate entities. 363 B.R. at 406.
The court in In re Webb MTN, LLC, No. 07-32016, 2008 WL 656271 *4, *6 (Bankr. E.D.
Tenn. March 6, 2008), similarly found the debtor to be a SARE debtor where no
development had actually commenced upon its property and it was not producing any
income and was passive in nature.
D. Other SARE Status Determination Issues
If multiple single-purpose entities, each owning a single project, and their
common parent file chapter 11 petitions, is each a SARE debtor? As it turns out, courts
have determined that the business operations of a debtor’s subsidiaries or affiliates can
also preclude SARE designation. In In re Philmont Development Co., 181 B.R. 220,
5
220-23 (Bankr. E.D. Pa. 1995), the court found that the debtor’s ownership and
management of nondebtor affiliates was sufficient to exclude the debtor from SARE
treatment.5In considering the effect of affiliated entities on the SARE designation
question, the following factors come into play:
whether the entities are under common management and control;
whether the entities’ operations are vertically integrated;
whether the entities file tax returns on a consolidated basis;
whether a unified marketing process is in place;
whether the entities have an auditor and tax advisor in common; and
whether cross-guaranties are in place.
Does the SARE determination require an element of intent? Does it matter
whether the case is viewed as an abusive chapter 11, filed primarily to frustrate the
exercise of foreclosure remedies and with no reasonable probability of a feasible plan?
See In re 83-84th Owners Corp., 214 B.R. 530, 534 (Bankr. E.D.N.Y. 1997). The Kara
Homes case involved multiple debtors, each responsible for acquiring developable land,
arranging for construction of units, and marketing and selling the units. In determining
each to be a SARE debtor, the court observed that “[m]arketing, sales and construction
[were] handled from a construction trailer and model located on each property” and that
the common area, amenities, and roadways were still in construction and development
states. 363 B.R. at 403.
In Philmont Development, the SARE determination was made as to the limited
partnership debtors, the only assets of which were the semi-detached houses that each had
individually purchased from the general partner. 181 B.R. at 221. The court found that
the semi-detached homes owned by the limited partnership debtors were comparable to
the type of real property at issue in a typical single asset real estate case.
Unreported decisions go in both directions. A California court addressed this
issue and held that, even if one or more debtors, when considered in isolation, would fall
5See also In re Kkemko, Inc., 181 B.R. 47 (Bankr. S.D. Ohio 1995).
6
within the ambit of §101(51B), the consolidated, interrelated business operation of the
collective group of debtors was sufficient to avoid a SARE designation. In the court’s
view, a ruling that the SARE provisions applied would inappropriately have elevated
form over substance. See Meruelo Maddux Properties, Inc., et al., No. SV 09-13356-KT
(Bankr. C.D. Cal. June 17, 2009).
A Florida bankruptcy court adopted the Meruelo Maddux analysis and found that
the debtors in In re Fiddler’s Creek, No. 8:10-bk-3846-KRM (Bankr. M.D. Fla. February
23, 2010), some of which owned only raw land, were not subject to the SARE provisions
because they were part of a larger enterprise and there was no indication of the type of
abuse on which the enactment of §362(d)(3) was premised. The Florida court articulated
the purpose of the SARE provisions as being the curtailment of abusive filings by debtors
with an absence of economic activity, a lack of significant employees, and/or lack of
going-concern value. Another Florida court took the opposite tack in In re Odyssey
Properties III, LLC, et. al., No. 8:10-bk-18713-CPM (Bankr. M.D. Fla. Aug. 2, 2010).
II. ARE POST-BAPCPA SARE CASES RESOLVED FASTER?
In addition to curbing abusive filings, the avowed purpose of §362(d)(3) was to
limit the length of case pendency and the concomitant perceived imposition on secured
creditors. The mechanism chosen was the creation of a set of special requisites for
keeping the automatic stay in place. Consequently, §362(d)(3) was amended to read as
follows:
On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—
… (3) with respect to a stay of an act against single asset real
estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later—
7
(A)the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or
(B)the debtor has commenced monthly payments that—
(i) may, in the debtor’s sole discretion, notwithstanding section 363(c)(2), be made from rents or other income generated before, on, or after the date of the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and
(ii) are in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditor's interest in the real estate.
11 U.S.C. §362(d)(3).
If a debtor is designated as a SARE, §362(d)(3) provides that stay relief must be
granted or the stay modified unless the debtor takes one of two alternative actions within
90 days after the filing of the bankruptcy case. The debtor must either have filed a plan
of reorganization that has a reasonable possibility of being confirmed or have
commenced monthly payments to all creditors the claims of which are secured by the
property (except judgment lienholders) in amounts equal to “interest at a current fair
market rate.”
If the debtor indicates on its voluntary petition that its business is “Single Asset
Real Estate” as defined in §101(51B), the time periods of §362(d)(3) automatically apply,
triggering modification of the stay 90 days after the SARE debtor’s petition date. If the
debtor does not mark the SARE designation on its petition, however, a subsequent SARE
determination by the court made more than 60 days after the petition date extends the 90-
day period to the date that is 30 days after the court’s SARE determination. Section
8
362(d)(3) allows for an extension of the 90-day period for cause on the determination of
the court if an order is entered within the 90-day period.6
For all the effort and language drafting that went into the BAPCPA amendments
affecting SARE cases, does §362(d)(3) actually expedite the process and drive the debtor
to file a plan sooner than would have been the case under prior law? On it face, the
amended provision would appear to expedite the process by requiring that a plan be filed
within 90 days. Suppose, however, that the debtor does not make a SARE designation in
its petition and schedules. In that instance, nothing will trigger the expedited plan filing
until a secured creditor subsequently files a motion seeking from a court a determination
that the debtor is a SARE entity. In that instance, unless the court’s determination is
made within the first 60 days of the filing, the stay will not become subject to being
modified until 30 days after the court’s determination that the debtor is a SARE debtor.
Moreover, §1121(b) gives a debtor the exclusive right to file a plan for 120 days. If the
debtor has not made the SARE designation when filing its petition, the time limitation for
filing a plan under §362(d)(3) will not expire until 30 days after the court has determined
the debtor to be a SARE entity, and that 30-day period could extend past the 120-day
exclusivity period. Accordingly, if the debtor has not made the SARE designation in the
petition, and no creditor has moved quickly for a court determination, the 120-day
exclusivity period in effect would trump the 90-day SARE filing period.7As discussed
above, the issue of whether a debtor is a SARE debtor is often a factually intensive one
that requires discovery and an evidentiary hearing -- which can cause further delay.
III. REQUIRED SUFFICIENCY FOR FILING A PLAN
The filing of a plan or the commencement of interest payments is not the end of
the story. If a debtor chooses the option of filing a plan to avoid stay modification, the
court will have to determine whether the plan has a “reasonable possibility of being
confirmed within a reasonable time.” Much case law has developed over what is meant
6 The time period for exclusivity under §1121 can also be extended upon a showing of cause. 7One trend that appears to exist is a decrease in the early filings by secured creditors of motions to
dismiss. Instead, creditors may be using subsection 362(d)(3) as a tool to wait to exercise their rights until after the SARE deadlines have run.
9
by a “reasonable possibility of being confirmed” and what constitutes a “reasonable
time.” Do these concepts require the court to conduct a mini-confirmation hearing in the
guise of a hearing on stay relief?
Although a full confirmation hearing is not required to make this determination,
courts have held that the debtor must propose a plan that is “arguably confirmable.” In re
The Terraces Subdivision, LLC, No. A07-00048-DMD, 2007 WL 2220448 (Bankr. D.
Alaska 2007); see also In re Heather Apartments Ltd. Partnership, 366 B.R. 45 (Bankr.
D. Minn. 2007). Obtaining stay relief pursuant to §362(d)(3)(A) requires more than a
showing that confirmation of a proposed plan is questionable. One court expressed its
view as follows:
[A]djudicating a relief from stay motion under §362(d)(3)(A) is not to be a mini-confirmation hearing. At a confirmation hearing, a debtor must prove its entitlement to confirm a plan under 11 U.S.C. §1129 by a preponderance of the evidence, and concerning the plan feasibility requirements of §1129(a)(11) in particular, the debtor must demonstrate that the confirmation of the plan is not “likely” to be filed [sic] [followed] by liquidation or the need for further financial reorganization. By comparison, the showing required by a debtor under §362(d)(3)(A) is only that the plan have a reasonable possibility of being confirmed, which is a lesser showing than that required at confirmation . . . In proving a “reasonable possibility” of plan confirmation, the stage of the proceeding assists in the showing a debtor must make: At a minimum the debtor must show that (1) it is proceeding to propose a plan of reorganization, (2) the proposed or contemplated plan has a realistic chance of being confirmed and (3) the proposed or contemplated plan is not patently unconfirmable.
In re Harmony Holdings, 393 B.R. 409 (Bankr. D.S.C. September 11, 2008) (citing In re
Windwood Heights, Inc., 385 B.R. 832, 838 (Bankr. N.D. W.Va. 2008)). The debtor
must show only that its plan has a reasonable prospect of success within a reasonable
time. In re 68 West 127 St., LLC, 285 B.R. 838, 848 (S.D.N.Y. 2002).
Arguably, the only certain way that a court could conclude in the context of a stay
relief hearing that a plan is “patently unconfirmable” is the lack of acceptance by at least
one impaired class of creditors. Section 1129(a)(10) imposes the confirmation
prerequisite that, if a class of claims is impaired under the plan, at least one class of
10
claims that is impaired under the plan must accept the plan, determined without inclusion
of the acceptance by any insider. In meeting the confirmation requirement of
§1129(a)(10), a SARE debtor would be in the position of having particular trouble
obtaining the vote of an impaired class. It is common for the typical SARE debtor to
have only a general unsecured claims class and its mortgage lender’s secured claim class.
Classifying the secured lender separately from other unsecured claims is often the only
means by which the debtor can satisfy §1129(a)(10). The issue of whether a debtor can
separately classify the unsecured deficiency claim of a secured creditor has been the
subject of great debate among courts and may even require an evidentiary showing on the
issue of whether the lender’s deficiency claim is sufficiently similar to the claims of trade
creditors to warrant being treated in the same class. If the debtor must separately classify
the lender’s deficiency claim in order to obtain the vote of an impaired class, then the
debtor will also have to deal with the absolute priority rule by either proposing to pay in
full the unsecured portion of the lender’s claim or providing for an auction of equity.
Other typical confirmation issues for SARE cases include factually intensive
matters such as whether the debtor has satisfied the good faith filing requirements of
§1129(a)(3), proven feasibility under §1129(a)(11), and met the cramdown requirements
of §1129(b). If the debtor satisfies the requirement of §1129(a)(10), it appears likely that
the bankruptcy court would keep the automatic stay in place until the confirmation
hearing, at which time the other contested confirmation issues such as appropriate
cramdown interest rate would be decided.
IV. WHAT LEVEL OF INTEREST PAYMENTS?
With respect to the alternative requirement to avoid stay modification, the debtor
can commence monthly payments of interest at the nondefault rate within the designated
period. See In re Cambridge Woodbridge Apartments, LLC, 299 B.R. 832, 849-40
(Bankr. N.D. Ohio 2003). Such interest payments are measured by the “value of the
creditor’s interest in the real estate,” which may be less than the full claim of the creditor.
If there is a disagreement on the value of the creditor’s interest in the real property,
11
evidence on this point will have to be presented to the court for determination. Litigation
over the amounts of monthly payments could cause further delay.
V. IS §362(d)(3) DUPLICATIVE OF §§362(d)(1) AND 362(d)(2)?
The provisions of subparagraphs (1) and (2) of §362(d) remain applicable to
SARE debtors. In Duvar Apts., Inc. v Dep, Ins. Corp. (In re Duvar Apts., Inc.), 205 B.R.
196, 200 (B.A.P. 9th Cir. 1996), the court determined §362(d) of the Bankruptcy Code to
have been drafted in the disjunctive and thus found that each subsection is an independent
alternative for relief without regard to SARE. What additional requirements does the
SARE-specific §362(d)(3) impose?
Section 362(d)(3) mandates compliance with one of two alternatives for keeping
the automatic stay in place: the debtor must either file a plan or commence monthly
payments. The requirement to file a plan seems reflective of the language in §362(d)(2),
except that §362(d)(3) includes the additional requirement that the plan actually have
been filed. The court in In re 68 West 127 St., LLC, 285 B.R. 847, discussed this issue as
follows:
[T]he Debtor also has satisfied the similar, if not identical, standards of sections 362(d)(2)(B) and 362(d)(3)(A) of the Bankruptcy Code. Those sections’ references to an “effective reorganization” and a “plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time” do not require a determination that the Debtor’s plan shall be confirmed.
285 B.R. at 847-48. Further, the alternative requirement to commence monthly
payments seems to mirror the substance of the requirement in §362(d)(2)to
furnish adequate protection of an interest in property. The notable difference is
that, in §362(d)(2), adequate protection can exist in multiple ways beyond
monthly payments, including providing insurance, compliance reporting
requirements, and providing an equity cushion.
The duplicative nature of §362(d)(3) is even more easily discernible in the
following visual depiction of its language:
12
VI. CONCLUSION
SARE-specific §362(d)(3) was added to the Bankruptcy Code to limit the length
of SARE cases. In the many instances in which the debtor does not of its own volition
make the SARE designation, however, the 90-day deadline is not implicated and such
cases can be as long in duration as that of a typical reorganization case. Further, the
protections provided for in the language of §362(d)(3) arguably are duplicative of those
in §362(d)(1) and §362(d)(2). It remains to be seen whether over the long haul the SARE
amendments will expedite the reorganization process and provide a balancing or
unbalancing factor in the tension between the real estate debtor and its secured creditor.
# # # #